FSA issues warning on structured products

7 Jun 2011

Financial Times

Investment products described as "guaranteed", "protected" or "secure" may have to carry an explanation stating exactly what these terms mean, in the latest warning from the Financial Services Authority that financial companies are not properly advertising risk to consumers.

So-called structured products, which offer people exposure to the stock market with some level of protection, were being promoted "without any clear and adequate justification for the descriptions used", the regulator said in a quarterly consultation paper on Monday. It has proposed introducing guidelines that would force financial services companies to explain the use of terms such as "guaranteed" in advertisements or factsheets.

Structured products are increasingly being marketed by banks and wealth managers to consumers who are tempted by the headline rates on offer at a time when returns on cash are still close to zero.

Typical products will lock up capital for five years and offer investors a proportion of any return on the stock market over that period. But many "guaranteed" products in fact only protect capital if the stock market does not fall below a certain level over a certain period of time.

The regulator has had the investment products on its radar after a review in 2009 of products backed by Lehman Brothers found that sales advice had been either unclear or misleading in two-thirds of cases.

But sales of structured products have shot up since the credit crunch, with a 48 per cent rise in new sales in 2009 compared with 2008, according to StructuredRetailProducts.com.

The UK retail market was worth £52bn at the end of 2010, up from £46bn the previous year. The FSA said it had taken steps to introduce the new rules after evidence that its current guidelines, introduced in 2001, were not working.

"We already have a rule that says firms have to be fair, clear and not misleading - but in a lot of cases we're finding that's not working," the FSA said.

Structured products have been behind some of the largest fines imposed by the regulator in recent months, including a £1.4m fine on Norwich & Peterborough Building Society in April for mis-selling the investments and a £700,000 fine on RSM Tenon last year.

Some independent financial advisers have also faced individual fines for failing to explain the risks of the products properly. A consultation on the proposal is open to August 6.

The FSA expects to publish the results of a separate, ongoing investigation into how structured products are sold and marketed to consumers later this year, which is expected to clamp down on sales practices further.